Segmented Trading Markets: Competition, Fees, and Tax Policies

60 Pages Posted: 1 Jun 2022 Last revised: 2 Dec 2022

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Oguzhan Celebi

Massachusetts Institute of Technology (MIT) - Department of Economics

Ali Kakhbod

University of California, Berkeley

A. Max Reppen

Boston University - Questrom School of Business

Date Written: May 1, 2022

Abstract

We study competition among segmented trading venues in which the venues differ in technology (fast vs. slow). Technological differentiation leads to higher trading fees, but has an ambiguous impact on trading volumes. Improvements in the slow venue increases trading volumes, whereas improvements in the fast venue might increase or decrease it. We also study the welfare effect of tax policies. In equilibrium, the tax rate to optimize tax revenue depends only on trader preferences, and is thus independent of the venue competition. With non-constant welfare weights the aggregate welfare can be maximized at nontrivial tax rates.

Keywords: Segmented markets. Digital economy. Crypto market. Competition.

JEL Classification: C7, D86, G2, L13, L86.

Suggested Citation

Back, Kerry and Celebi, Oguzhan and Kakhbod, Ali and Reppen, Anders, Segmented Trading Markets: Competition, Fees, and Tax Policies (May 1, 2022). Boston University Questrom School of Business Research Paper No. 4119978, Available at SSRN: https://ssrn.com/abstract=4119978 or http://dx.doi.org/10.2139/ssrn.4119978

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Oguzhan Celebi

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Anders Reppen

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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